Tuesday, May 20, 2008

Steak n Shake Co. (SNS) is a casual dining chain with 502 restaurants in 21 states. SNS stands out even in the battered restaurant industry as a particularly poor performer. The stock was at $19 back in Nov 2006 and is now at $6.57.

The company has long been a target of activist investors including Sardar Biglari, who got himself elected to the board of SNS in March. SNS reported earnings last week and they were dismal as expected. During the conference call, management took a beating from a couple of investors, including one who identified herself as the "founder" of the chain. Here are the two exchanges:

Question 1

"Yes, my name is Sue Aramian. I have been asked many, many times to comment upon the company that I co-founded with E.W. Kelley in 1981. I have refused every request until this statement that I am making to you, and I am taking this position at this time for the following reasons. Currently as you know, there is no permanent CEO to lead this company and there has been a vacuum of leadership that has not been corrected. This continued lack of leadership has resulted in a vacuum which in turn has resulted in poor operational results. This fact is indisputable."

"I am aware that the immediate response would be that the board is looking for a replacement. However, shareholders were told in August of 2007 that this search would begin promptly and it is now 10 months since that day and we are still talking about not having a CEO. I was very surprised to learn that it only started in February of 2008."

"Previous earnings over too many years have been disappointing, have been dismal and there is no mention of shareholder value which has diminished in an intolerable manner. I do not even mention dividends as I certainly understand that the board could in no way authorize the distribution when the balance sheet demonstrates that without inflow of money, there can be no outflow."

"However, and importantly, management salaries, director fees, change of controlled severances, G&A expenses, et cetera, have all increased dramatically, which would be justifiable if there was a corresponding value for shareholders. You have operated with the same team doing the same thing getting the same results. These results have brought the company to this undesired state."

"I have informally visited many units recently, discussed the situation with loyal employees who recognized me and asked for anonymity because of fear of losing their jobs. Naturally these employees have great concern; it all stems from lack of good leadership and an understanding and appreciation of the basic concept. I for one am saddened that after many years of continued growth and success, a company which has enjoyed iconic stature in the Midwest is now known as a sick company. I continue to believe in the concept and company. Your report released today again, as in the many past years, underlines this assessment."

Management response from Jeffrey A. Blade

"I don’t believe there was a question in that, so we’ll go on to the next question."

Question 2

David Freeman - Freeman Capital

"This question is for Mr. Blade and Mr. Kelley; you guys have been leading this company for quite some time now and the results have just continued to be dismal, dismal, and it just keeps going down the drain. And I can’t see how it can get any worse. And my question to you, and it kind of continues what that other woman was saying before, my question to you is when are you guys going to lead the company so we could start creating some value for this [firm]? Because after so many years, that looks like the only important question at this time to me, because you can’t promote your way out of this problem. There’s service issues, there’s cleanliness issues. So that’s my question to you."

Management response from Wayne L. Kelley

"We appreciate your concern. I will tell you that I don’t think we plan to leave the company anytime in the near future but we do appreciate your concern and interest."